125 discrimination testing - when and how to fix = ?!

[Guest Happy Actuary]

Can anyone please clarify the correction methodology and timing? I realize that a failed test c/n/b corrected after year end, and that all deferrals become taxable to the HCE's. That's fine.

My question is the option one may have for correction < year end. Can you simply impute enough W-2 income as needed to pass the test (a much better solution)? If so, where does it say that you can do this? If this is true, this method appears at odds with the first, i.e., how would anyone know if you "ran the tests" on 12/29/03 or 1/3/04?

Sorry I am so confused!!